Commentary: The World is Changing and the Time is Now For Pension Reform

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pension-reform-stockThe other day I was reading a little blurb from Steven Greenhut, the right wing or libertarian depending on your perspective, who has led the charge for pension reform.  He was talking about an experience in the PERS committee listening to testimony over SB 919, a pension-reform bill.

What caught my attention in particular was the union representatives kept talking about the fact that pension liabilities can be fixed at the bargaining table.  Now Mr. Greenhut called that utter nonsense and argued that “the unions control the bargaining table. It’s been at the bargaining table where these massive liabilities have been created.”

The fact of the matter is that if pension liabilities can be fixed at the bargaining table, then unions need to step up and fix them at the bargaining table, post haste.  Because if this ends up being solved through ballot initiative, the unions are not going to like it.  It is not going to happen this year, but at some point the voters will be fed up, and it will be liberal union supporters like myself who lead the charge.

Let me flash back to a meeting I had back in November.  A mutual friend put me in touch with two ladies from the California Labor Federation. They ostensibly wanted to start a discussion on my view of firefighter pensions and to educate me on their point of view.  I have never in my life shied away from discussion and learning things from other people’s perspective.  But this was no friendly meeting.

Instead, I was browbeat for an hour by these two ladies who apparently were blaming me for all that was going awry on the pension issue.  Their argument was that unions needed to stick together.  They were not about to sell their public safety brethren who are rarely there for the average working Joe down a river on pension reform.  They argued like they apparently argued last week, that pension reform was underway and could be solved through collective bargaining.  And finally they argued that in 2005, the only reason the Governor’s pension reform initiative failed was because of public safety.

The fact of the matter is that most people in 2005 did not know much about public safety enhanced benefits.  Even though the concept started in the late 1990s and most cities had gone to 3% at 50, most people outside of the business did not really understand it.  For me it was not until 2008 that I really began to see where this ship was heading.

People need to understand, I am a union guy through and though.  So too are people like Lamar Heystek.  Mr. Heystek was the union shop steward for his union at Safeway.  I have been an active member of at least three unions, I grew up in a two union household, I worked for a union.  I even worked to get a union person elected to the PERS board.  I have walked the picket line with unions.  I have covered their issues.  And I believe in the collective bargaining process.

Here’s the real problem, the average PERS recipient receives around $27,000 in PERS pensions.  Try living on that in California.  It’s not a lot of money.  My wife represents people who are lucky if they get that in salary, let alone in pensions.  These are people getting 2% at 60.  If they work for 30 years, they are going to get 60% of their final wage.  Even if that’s $40,000, they are only looking at about 60% most of them. 

And yet, if the retirement system is reformed or the system collapses they are the ones most vulnerable.  They are not the people making the types of pensions that are going to collapse the pension system.  They are not getting at least $80,000 like a lot of public safety.  They are not getting over $100,000 like most managers who are not union members at all.

The primary beneficiaries of this system are either non-union management and public safety, most of whom oppose the basic agenda that the average working person is fighting for.  So why the need to defend them? 

Meanwhile, the pension system is going to break the back of local government.  Currently one-third of Davis’ general plan budget is going to future retirees.  That number will increase in the next five years depending on PERS sense of their projected earnings.  Already there are signs that the number will decrease.

For instance, it was reported yesterday that the PERS is set to take up a proposal that will recommend the state should increase its pension contribution by $600 million for the next fiscal year.  The state gets a lot of the press for its budget woes, but local government is the one in real trouble.

It is getting worse.  CalPERS was told to expect lower investment return over the next 10 years, falling shy of the 7.75 percent forecast they have been using since 2003 and that they have based their current rates on.  Now they are looking at a 7 to 7.7 percent return, which may not seem like a huge difference, but it will affect contribution rates by millions of dollars.  Consultants said in part that returns are expected to fall because markets are becoming increasingly volatile.
Right now the legislature is divided on this issue along party lines, but that is going to start changing, because Democrats who worked in local government and come out of local government are going to have a very different view of the pension system than those there now.

The problem for people like me is that I cannot support SB 919 or the proposal that would have been on the ballot.  It’s too draconian.  It hurts the people at the bottom far too much.  And they are not the problem.  The state and pension system are not going broke because of the people making $20,000 in pensions, they are going broke because of the people making $80,000, $100,000 even $200,000 in pensions.  That is what needs to be fixed.

The unions are correct, it could be fixed at the bargaining table – so fix it.  Do it now.  If you do, this issue goes away.

There are several things that need to be fixed.  First, we need to raise the retirement age.  When they originally set the retirement system at 65, people were not expected to live much longer than that.  So paying for a few years of retirement was not going to break the system.  Instead we are getting people to retire at 50 or 55, when people may realistically live another 30, 40, 50 years or even longer.  That is a lot of time to pay non-productive people.  By non-productive, you are paying them and getting no product from them in return.  Meanwhile many go on to have a second career.  The budget crisis actually feeds this problem so we have a slew of early retirements as a way to shift people off the current books and onto the PERS system where we will pay for that in the long term.

Second, I am okay with defined benefits if and this is a big if, the rates were lower or the contributions from employees were higher.  I know many want to go to a 401K style system with defined contributions instead of benefits.  But I think either can work.

The problem that we have in Davis is that many of our employees we actually pick up their portion of the contributions.  And when we do shift to them covering for their own portion, it is off-set by a salary increase.  So that’s what happened this year, when city employees agreed to take on 2% of their contributions and also cap against PERS rate increases, but it was a straight trade in which they got that same 2% in the form of a pay increase.  How does that save the city money?

The bottom line here is that the clock is ticking.  There are going to be two solutions to this problem.  One is that public sector employees give a little and help reform the system on their own.  They crack down on the worst pension spikers, cap benefits, raise the retirement age, and increase contributions.  That all can in fact be done at the bargaining table.

The other solution will be the taxpayers revolving like they did with Proposition 13.  The unions will fight any initiative every step of the way no doubt.  But at some point if the system is not fixed they will lose.  It won’t be this year, but if they are starting to lose liberal union supporters, then they have to know their days are numbered. 

I want to avoid seeing people who make $27,000 lose their pensions.  Most of those people are not wealthy, they took less for the security of working in the public sector, and their pensions are not going to bring down the system.

I do not want to see teachers or university employees lose their pension.  But unless we fix the overall system that could very well be what happens.

I have no idea how the city of Davis is going to pay for a doubling of its pension payments in the next five years.  I have no idea how we are going to continue to hand out $4 million for cafeteria payouts, to pay to people whose spouses have health insurance.  And I have no idea how we will be able to fully fund our retirement health liabilities which will cost us $4 million a year over 30 years.  Between those three things, we are talking maybe as much as $22 million by 2015.  This year our general fund is only around $36 million. 

Where is the rest of the money coming from?  The fuse is lit.  The timer is running.  Time is not on our side.

—David M. Greenwald reporting

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About The Author

David Greenwald is the founder, editor, and executive director of the Davis Vanguard. He founded the Vanguard in 2006. David Greenwald moved to Davis in 1996 to attend Graduate School at UC Davis in Political Science. He lives in South Davis with his wife Cecilia Escamilla Greenwald and three children.

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25 thoughts on “Commentary: The World is Changing and the Time is Now For Pension Reform”

  1. Neutral

    You continually call for pension reform as if all 200,000+ State – and all County and City – union employees were signatory to the same contract. Horse hockey. Your beef is with specific terms of specific contracts. Stick to those.

  2. hpierce

    David… please clarify where you are coming from… you cite an example of someone retiring after 30 years of service, under a 2%@60, getting 60% of salary. That implies entering public service @ 30 years of age (what were they doing since they graduated from high school @ 18 or college @ 22? Didn’t they get 401’s, SS, or other pension credits during that time?) and retiring @ 60. This is interesting as many of the writers on this blog point out that workers should not receive retirement until the “normal” retirement age of 65 (and rising). The %-age under the 2 %@60 rises as the age at retirement does. Assuming from your example, what other income (SS, 401k, etc) does your employee have at retirement? What is their TOTAL benefit?

    Second, you seem to imply that if an employee making 50k per year retires @ 60 after 30 years of service, 30k per year is “not a problem”, but if a professional who made 95k per year retires at age 60, who has worked for an agency since they were 22 (hence no SS, nor 401k), after a 38 year (opposed to the 30 in your example) draws a $72 k pension, there is a problem. Should janitors be paid, during their work years, the same as professional engineers? In retirement as well? I know a number of people who espouse that “social justice” would dictate so. This philosophy sometimes showing up as ‘comparable worth’ is one of the factors that makes public sector admin/clerical positions much higher compensated than in the private sector.

    Let me (us)understand where you are coming from from a ‘social justice’ perspective.

  3. Greg Kuperberg

    [i]The other day I was reading a little blurb from Steven Greenhut, the right wing or libertarian depending on your perspective, who has led the charge for pension reform.[/i]

    Greenhut was wise enough to notice something wrong with the Iraq war, but certainly in general he’s a Howard Jarvis type.

    [i]Now Mr. Greenhut called that utter nonsense and argued that “the unions control the bargaining table. It’s been at the bargaining table where these massive liabilities have been created.”[/i]

    Mr. Greenhut expresses a valid point in tendentious terms. The real point is that SB 400, which passed in 1999, tilted the bargaining table by creating 3% at 50 and 2.5% at 55. Greenhut wants SB 919, which will tilt it in another direction.

    [i]The fact of the matter is that if pension liabilities can be fixed at the bargaining table, then unions need to step up and fix them at the bargaining table, post haste.[/i]

    Now that is really blowing smoke. Expecting a local union to fix CalPERS at its bargaining table is like expecting me to fix a tax loophole at my accounting table. Even if I think that it’s a bad loophole, I’m not going to just donate money to the government, and even if I did, it wouldn’t eliminate the loophole.

    Likewise, as Rich has pointed out many times, unions are entitled to bargain for their own interest. That’s the whole point of unions. Legislation created the problem with CalPERS and legislation is needed to solve the problem.

    [i]People need to understand, I am a union guy through and though.[/i]

    Sure, just like Clarence Thomas is black and Ralph Nader is a consumer advocate. That doesn’t stop them from being opportunists.

    If you wanted to be trustworthy on this issue, you would first of all adjust for inflation in all of your figures. That would be step one. You also wouldn’t ask local unions to bargain against their own interests.

  4. Neutral

    Yes, I read it. With the exception of (my count) two short graphs, the rest of the piece (and nearly *all* of your previous coverage of the issue) deals with provisions in firefighter and management union contracts.

  5. David M. Greenwald

    Management contracts are not union. But the point is that I recommend that they be solved at the collective bargaining level which by definition covers your previous point of contract by contract.

  6. David M. Greenwald

    “Expecting a local union to fix CalPERS at its bargaining table is like expecting me to fix a tax loophole at my accounting table. “

    First of all, they (the unions) offered that as the solution. But if you’re suggesting that was disingenuous then okay.

    But second, I expect that the bargaining process can fix it, if the unions recognize that they need to fix it or face potentially worse problems down the road.

  7. Greg Kuperberg

    Maybe when you say that you’re a union guy, what you mean is that you’re just as eager to be disingenuous as the unions are. Yes, the unions are disingenuous about SB400.

    The fact remains that you’re fudging the difference between one union’s interest and, hypothetically, the collective interest of all of the unions in the state. I don’t think that you’re genuinely confused about the distinction. I think it’s propaganda.

  8. David M. Greenwald

    I’m not quite following you here. How am I fudging the difference between one union’s interest and the collective interest of all of the unions in the state?

  9. Rich Rifkin

    [i]”Here’s the real problem, the average PERS recipient receives around $27,000 in PERS pensions.”[/i]

    David, do you have a source for that $27,000 figure? I also wonder if that is an average or a median?

    The reason I ask is because I think there are a large number of “pensioners” by way of CalPERS who only worked a part of their careers in the PERS’ system. Maybe the person retired after working 40 years. But of those 40 years, 10 could have been in the PERS system, another 10 could have been out of state for a public agency, and 20 could have been in the private sector. That sort of career is very common. And it results in a much smaller PERS pension.

    My suspicion is that the average PERS pensioner, who worked his entire career for public agencies in California has a much higher annual pension than $27,000 (plus soc. security + income from other investments and savings).

  10. Rich Rifkin

    In the Bee today, Dan Walters writes about AB1987 ([url]http://www.sacbee.com/2010/05/18/2757694/dan-walters-california-pension.html#storylink=omni_popular[/url]), which was intended to end the problem of pension spiking–that is, massively inflating a final salary upon which the pension is based, so that the pensioner takes home a lot more money to start with and thus a lot more for the rest of his life.**

    I don’t know if David has discovered anything otherwise, but I have yet to find any real proof of pension spiking in Davis. Walters writes about an unnamed fire chief: [quote] One retired fire chief, for example, managed to get a $241,000 pension even though his salary was $185,000. [/quote] I don’t know the details of how that was done. But I specifically investigated the pension of our recently retired fire chief, Rose Conroy, for my column, and I found everything is kosher with her pension. (In fact, it’s a couple of dollars shy–literally $2–of what I calculated it would be.)

    Her final salary* was around $144,000. She worked 30 years for the City of Davis. 30 x 3% = 90%.** 90% of $144k = $129,600 per year. Her actual pension, confirmed by my PRR to PERs is just under that amount. So there was no spiking or any other shenanigans. She is getting just what she is supposed to get per her agreement with the City and with PERS.

    If there has been any spiking in Davis, it is of a different sort. It is elevating an employee to a higher paid position within a year or two of his retirement, so that his lifetime benefits will be based on that last position. Yet even with that, I have not yet found a single instance where I would be willing to say with any confidence at all that is what happened. (Off the record, a couple of retired Davis firefighters approached me a few years ago and told me that “PERSON X,” revealing the name, was promoted to captain so PERSON X could retire with a higher pension. It’s possible that is right. But I could not figure out how to prove that. It’s entirely possible that there were perfectly good reasons to promote that person. And just who gets promoted to fire captain has been controversial in Davis for other reasons for quite some time.)

    *I don’t have the figures handy at the moment. So these are close.

    **Walters references another columnist, Daniel Borenstein of the Contra Costa Times, who notes a change in AB1987 was made by Assemblywoman Fiona Ma, D-San Francisco (who is a union lackey): “… it would boost retirees’ pensions by as much as 6.7 percent …” So much for pension reform by members of the Assembly who accept large contributions from the unions.

  11. David M. Greenwald

    I’ve seen it cited in a lot of places, you might check out Jon Ortiz’s Sac Bee blog.

    I too have not seen evidence of pension spiking in Davis. At one point I attempted to look at the last five years prior to retirement, but never found anything that looked like a trend or resembled spiking.

  12. hpierce

    Rich & David… I believe you are right… there may have been 1 or 2 pension “spikings” in Davis, but the last time I even heard rumors of one was ~ 20 years ago. I am in contact with a lot of former & current city employees…

  13. wesley506

    It it not all that unusual for a state employee who is very qualified and competent to promote to a higher classification, to instead choose to stay at a lower classification quite simply because they do not want to get involved in all the politics that typically goes with a supervisory or management position. When they get within a year or two of retirement, they promote so as to increase the base salary amount from which their pension is calculated. Is this a felony? I think not.

    Non-represented civil service management can typically count on getting at least the same benefit package that the rank and file employees get. It’s some times referred to as being a member of the “me too non-union.” As a manager it is also not unusual for pay scales to be set so you typically are guaranteed to get at least 5% more than the highest paid person you supervise. I assume in Davis the situation is similar. These are two very big incentives for city managers negotiating with unions to agree to benefit packages for rank and file staff which are more generous that what an independent negotiator would agree to.

  14. hpierce

    wesley’s comment is interesting… an “independent negotiator”? I think not, except with binding arbitration where (as I understand it) BOTH parties select the individual, and agree to split the costs of his/her services… by definition (I believe) a negotiator tries to represent the interest of those who pay them, with no regard to the interest of the other party. Wesley’s comment also seems to presume that the independent negotiator will seek to see “how low can you go?”, without any consideration (unless instructed by those paying for his/her services) of whether that course is best in regard to retaining ‘the best & brightest’… perhaps all public sector employees, including teachers, should go to a “pay for performance” model. CTA will have apoplexy…

  15. Neutral

    David: Management contracts are not union.

    ‘Management’ = traditionally FLSA exempt (professional, managerial, supervisorial). Apologies for the shorthand.

  16. Gunrock

    I am looking forward to the whole budget mess cratering so we can go down and shred all union agreements have the state seize PERS as a way to staunch its budget wounds… they get social security so why should we care?

  17. Rich Rifkin

    [i]”As a [u]manager[/u] it is also not unusual for pay scales to be set so you typically are guaranteed to get at least 5% more than the highest paid person you supervise.”[/i]

    In the City of Davis, one way some employee salaries inflated in the last decade was to create new positions which sound like they are management or supervisorial, when in fact those employees have no one directly underneath them to manage.

    Also, in the Fire Department, they have been pushing a “reorganization” which only serves to increase the number of “management” positions at the expense of firefighter positions. So you get more managers with fewer to manage. But those managed are made better off, because this reorganization will guarantee them more overtime pay.

    And while that 5% rule may apply in Davis — I don’t know if it is a written policy — it is the case that with overtime, most years the Fire Chief made [i]less[/i] in take home pay than a number of the fire captains, because the chief makes no overtime pay, but the captains make a killing on it.

  18. wesley506

    The general 5% is obviously only the base salary because there is no way to control for overtime. For example if it is a big fire season and there are lots of mutual aid calls, all of this would be OT and those that get OT would make much more than exempt managerial staff. The adding of un-necesary layers of more and more managerial staff is unfortunately pretty common. It whenever given the chance, most people cannot resist the temptation to enlarge their empire. This may be how we ened up with so many city planners.

    If the city hired a independent negotiator to represent the city’s interests in union negotiations, there would be no incentive for this person to give away the store. As it is now there are several incentives for city managers to agree to very generous benefits. The city can hire anyone it wants to to represent it’s interests, and they are not subject to approval by anybody except those who are paying the bill which in this case would be the city. Mutually agreed upon mediators only apply if there is a binding arbitration clause in the MOU. Binding arbitration may only be relevant if there is an impasse, and some sort of contractual agreement that stipulates binding arbitration via a mutually agreed upon mediator will go into effect if there is an impasse. On many occasions the state and the unions have been at an impasse and the result was that the conditions of the expired contract merely remained in effect. This has gone on for years and as a matter of fact the prison guards union has been without a contract since 2007. The City of Davis does not need the best and the brightest, and will never be able to afford the best and the brightest. We merely need the reasonably competent.

  19. Rich Rifkin

    [i]”For example if it is a big fire season and there are lots of mutual aid calls, all of this would be OT and those that get OT would make much more than exempt managerial staff.”[/i]

    FWIW, that is the only OT in Davis which is not a problem for the city budget. The state pays it. However, as the contracts are written, we guarantee OT for every firefighter every pay period, for just “working” (i.e., sleeping) their normal hours. On top of that, the OT system is very easy to game, by calling in sick at just the right time, so your buddies can get more OT to fill in for you, and then the favor is later returned. Also, because we have this system of having to always have full-staffing of a minimum of 4 on a shift (which most area departments do not have), any time a firefighter leaves for say jury duty, all the others collect even more OT.

    We could easily eliminate virtually all of the city’s OT bill for the fire department (around $600,000/year) by making two simple changes: 1) Adopt new contracts which only pay the firefighters for the hours they are actually working, as opposed to sleeping; and 2) reduce our minimum staffing standard to 3 per truck, so that when someone is sick or not available, we don’t have to fill in for him with someone making OT.

  20. wesley506

    My error on how firefighter OT is paid. Does CHP and the Sheriff’s dept bill UCD for the City of Davis for OT required to cover student protests and picnic day?

  21. Rich Rifkin

    [i]”Does CHP and the Sheriff’s dept bill UCD for the City of Davis for OT required to cover student protests and picnic day?”[/i]

    I don’t know.

  22. David M. Greenwald

    I believe they have mutual aid agreements which is different from the state using firefighters for weeks at a time fighting forest fires.

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